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Before: Shri Laliet Kumar & Dr. Mitha Lal Meena
In the Income-Tax Appellate Tribunal, Agra Bench, Agra
Before : Shri Laliet Kumar, Judicial Member And Dr. Mitha Lal Meena, Accountant Member
ITA No. 299/Agra/2013 Assessment Year: 2007-08
Smt. Neeta Sharma, vs. ACIT, Circle-2, Prop- M/s Sharma International Agra 5-Lata Kunj, Mathura Road, Agra 282007 PAN ABUPS3306C (Appellant) (Respondent)
ITA No. 286/Agra/2013 Assessment Year: 2007-08
ACIT, Circle-2, vs. Smt. Neeta Sharma, Agra Prop- M/s Sharma International 5-Lata Kunj, Mathura Road, Agra 282007 PAN ABUPS3306C (Appellant) (Respondent)
Appellant by Shri NavinGargh, Advocate Respondent by Shri WashimArashad, Sr. DR
Date of Hearing 19.07.2019 Date of Pronouncement 19.08.2019
ORDER Per Laliet Kumar, J.M.: Present appeals are being filed by the assessee and the Revenue, feeling aggrieved by the orders of the ld. CIT(A) for the assessment years 2007-08. The ground raised by assessee in A.Y. 2007-08 read as under :
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“1.1 Because in any view, the addition confirmed by Id. CIT(A) of Rs.4,39,076/- for so called negative balance in cash book in the facts and circumstances of the case is arbitrary, perverse, wrong, illegal, and against the facts and law of the case. 1.2 Because in any view, the Id. CIT (A) grossly erred in confirming the above Addition by treating the explanation with evidences already on record before A.O. as being not admitted u/s 46A of the I.T. Rules on one hand and taking its authenticity as not established-oil other hand, and in the peculiar facts of ;r opportunity of being heard not given by the A.O. 2. Because in any view, the addition made and confirmed by Id. CIT(A) of Rs.10,70,553/- out of total addition of Rs.85,17,451/- by applying G.P. rate of 15% (against 12.29% declared) is arbitrary, unjust, wrong, illegal, and against the facts and law of the case. 3. Because in any view, the addition confirmed by Id. CIT(A) by disallowing interest in excess of interest 12% to relatives u/s 40A(2)(b) viz-a-viz (i) Shri Ramesh Chand Sharma, (ii) Ramesh Chand Sharma HUF, (iii) Devangi Sharma, and (iv) Smt. Shivangi Sharma is arbitrary, unjust, excessive, and against the facts and law of the case. 4. Because in any view the addition confirmed by Id. CIT(A) made u/s 40A(3) of Rs.14,000/- (20% of total payment 70,000/- i.e. Rs.30,000/- to Rehmat Ali + Rs.40,000/- to Vashdev) is arbitrary, unjust, wrong, illegal and against the facts and law of the case. 5. Because in any view, and without prejudice, and without admitting the addition made and confirmed in ground No.1 and 2 above the Id. CIT(A) has grossly erred in not allowing the telescoping of so called unexplained investment of negative cash balance (Ground No.1) and addition of extra income (Ground No.2). 6. Because in any view, the Id. CIT (A) has erred in confirming the interest charged u/s 234A, 234B, and 234C which is wrong, and illegal. 7. Because in any view, and without prejudice to the above grounds, additions made, interest charged, and the Assessment Order passed is wrong, illegal, without proper opportunity, bad in law and against the facts and law of the case.”
1.1. The Revenue has raised the following grounds: “1. That the Ld. CIT(A)-I, Agra has erred in law and on facts by restricting the addition to Rs.10,70,553/- as against Rs.85,17,451/- made by the A.O on difference in stock value, as shown to the bank vis-a-vis as shown in the books of account without appreciating the facts of the case. 2. That the Ld. CIT(A)-I, Agra has erred in law and on facts by directing the A.O to compute the disallowable interest amount by taking the rate of interest @ 3%, without appreciating the facts that the relatives or family members of the assessee
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are claiming 15% rate of interest while unrelated parties are charging @8% to 6% . 3. That the Ld. CIT(A)-I, Agra has erred in law and on facts by restricting the addition to Rs,14,000/- as against Rs.103,000/-made by the A.O. on account of payment made through bearer cheques, without appreciating the facts of the case. 4. That the appellant craves leave to add or delete or alter or modify any one or more ground(s) of appeal during the appellate proceedings. 5. That the order of the CIT(A)-1, Agra being erroneous in law and on facts be set aside and that the order of the Assessing Officer be restored.” Submissions 2. The ld. AR for the assessee had submitted that the assessee has instructed the counsel for not pressing the ground 1, of the appeal of the assessee. It was requested that the same may kindly be dismissed as not pressed. Accordingly we dismiss the ground number one of the assessee appeal as not pressed.
Ground No. 2 of Appellant’s ITA No. 299/AG/2013 and cross appeal of the revenue Ground No. 1ITA No. 286/AG/2013]
Apropos Second issue of the assessee appeal and ground one of the revenue appeal for arising out of the order passed by the assessing officer, which are dealt by the AO in the assessment order is with regard to the discrepancies in the stock disclosed in the books of accounts and the stock report submitted before the Bank from where credit limit for overdraft account has been taken by the assessee (appellant) by the hypothecation of stock. In this regard, the A.O. found that the total value of stock declared to the bank has been found to be Rs.1,09,50,000/- while the value of stock recorded in the books of accounts is only Rs.24,32,549/- and hence, there is a difference of Rs. 85,17,451/- in the value of closing stock as furnished by the assessee to two different authorities. The AO has made further enquiry from the assessee (appellant) as well as from the bank to ascertain the reason for such discrepancy and after considering the
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submission of the assessee (appellant) and information provided by the bank, he held that the difference amount of Rs. 85,17,451/- is unexplained investment made bythe assessee (appellant) in the stock shown in excess to the bank and made the addition of Rs. 85,17,451/-. The detailed discussion has been made by the AO in this regard from Page no. 6 to page no. 13 of the assessment order. 4. Feeling aggrieved by the order passed by the assessing officer, which was forming part of the assessment order at page 6 to 13 the assessee preferred an appeal before the Commissioner appeal, the Commissioner appeal at page28-29 deals with the issue in the following manner: “6.3 in the above written submission, the learned AR further tried to emphasise about the stock statement filed with the bank being a formality as the bank limit was fully secure by documentation of mortgage of immovable property and personal guarantee. In this regard he is also submitted an affidavit of Shri Ramesh chandsharma OSI in the stock statement submitted before the bank on behalf of the assessee (appellant) in which it has been solemnly affirmed by him that the stock statement submitted to Punjab national bank as on 31.03.thousand 7 to avail drawing power in banking and mentoring stock of Rs 109.5 lac it is submitted only in Vogue and form and correct and in summary manner irrespective of actual stock. It has also been mentioned in this affidavit that it is physically and practically not possible, neither done to verify the correctness of the quantity and date of stock furnished as per the statement. The ld. AR has also tried to present in the written submission that the inspection of stock as referred by the AO done by the bank manager has not in fact been done and then are merely initials of the manager in the name of the borrower and designation to have been written in abbreviation form. To prove this point the ld. AR has pointed out many infirmities in the inspection report of the bank relied upon by the AO. The first infirmity pointed out is that the column be of the inspection report mentioning serial number, areas, comments by inspection officer are totally blank. It is further pointed out that question is mentioned from serial number 1 to 8 of inspection report are also blank. Column C for giving details of items of stock which are physically inspected and verified as regard to quantity quality value and
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marketability and aviation observed are also blank. The column D of the inspection report for mentioning any adverse feature noticed is also blank and therefore, finally, it has been concluded by the learned AR that such blank Performa of the inspection report only signed at the end of the Performa shows that the report has been initialed in routine manner casually. The ld. AR has further pointed out that it shall not be out of place to mention here that if it has been actual stock no requirement of loan would have arisen. The stock taken is dated 31st 03.2007 and so- called inspection report is dated 11.4.2007 in between 11 days no transaction would be taken place. He has also pointed out that point it is mentioned in the stock statement are so used totalling to 121000 pieces of various items containing handicraft item which are very fragile and small and generally kept in Khartoum filled with packing material and case, these items are systematically inspected by the bank manager, these items were required to be taken out 2, these items individually and such process of inspection to get completed, it would have taken weeks and weeks with huge involvement of labour. By raising such argument about the practicality of stock taking of such use item shown in the stock as showing the blank Performa of inspection report, which was only initiated by the bank manager at the end of the Performa, the ld. AR has tried to show that no such inspection has ever taken place. In order to show the stock statement furnished to the bank being vacant casual, the ld. AR has also pointed out that in stock statement 9 items are shown despite the fact that the assessee, (appellant) days in various varieties and size of item and that too in the stock there were finished semifinished/finished goods as well as the raw material and packing material but in stock statement, no such items of raw material or packing material are mentioned and it has been shown by him that in closing stock of Rupees 2432549/hundreds of items are included including stock of finished goods, semifinished goods, packing material and raw material while the stock statement furnished to the bank, valued at Rs 109.5 lac, only 9 items were included…………….” 5. After receiving the written submission from the assessee, learned CIT A, had asked the Assessing Officer to file the remand report on the written submissions filed by the assessee. AO had filed the remand report however in the remand report despite the direction of the learned CIT A, AO had failed to verify from the
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bank about the genuineness of the inspection report of the stock which was challenged by the assessee( para 6.4 of impunged order) and AO had also not examined Shri Ramesh chand Sharma who had filled the affidavit filed, by stating ,that it was a self-serving document. No statement of Shri Sharma was recorded by the assessing officer contradicting the affidavit filed by him before the AO as well as before the learned CIT A. 6. The learned CIT A paragraph 6.8 of his order after discussing the written submissions filed by the assessee as well as the remand report received by him from the assessing officer, concluded that that the inspection report of the bank officials was not carried out and therefore the same cannot be relied upon for the purposes of arriving at the stock in the premises of the assessee.
The learned CIT A in paragraph 6.9 , Cit has also came to the conclusion that the stock of the assessee shown in the balance-sheet was not verifiable as during assessment proceedings the assessee failed to give the details of the stock at the basis of arriving at the figure of Rupees 2432549/-in the balance-sheet. The learned CIT a at page 38 had mentioned as under:-
“ In the present case also, I find that the books of accounts of the assessee (appellant) has not been properly maintained as it has been confirmed by the special auditor and therefore it is not possible to get a true and fair view of balance-sheet and profit and loss account furnished by the assessee (appellant). Even the stock shown in the balance-sheet could not be verified by the auditor because of non-maintenance of any stock register by the assessee ( appellant ) . At one place, the assessee(appellant) it showing the stock of only Rupees 24, 32, 549/in the balance-sheet claiming that this is actual stock and at the same time, a very high value of stock is being shown at ₹ 1, 09, 50, 000/to the bank for availing the credit facility. But both the stock items have neither been verified by the auditor nor by the bank officials. Therefore, correctness of correct amount of stock in this books of account of the assessee is not sustainable coupled with the fact that that even the books of account have not been properly maintained by the assessee (appellant) as observed by the special auditor. Therefore, books of account of the assessee cannot be
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relied upon and is liable for being rejected as per provisions of section 145(3) because books of account maintained by the assessee were neither complete nor accurate…………………..”
The learned CIT A at page 39 had mentioned as under:-“ I have also noticed after going through the assessment record of the assessee that this is the first year of the business operation of the assessee and within such a short period, it cannot be possible to earn a huge amount of unaccounted income to the tune of Rupees 85 lakhs to be invested in accountant stock and even if such unaccounted stock has been created by the appellant such stock should have been at least found during the course of survey which was carried out on 21.02.2007.the first stock statement was furnished to the bank on 28. 02. 2007 just after 7 days after survey which showed stock of Rs 95 lakhs but during the course of survey no such huge amount of stock was found and it cannot be possible for the assessee to purchase stock of such a huge amount within 7 days. I have also noticed that the stock of ₹ 1, 09, 50, 000/ have been shown in stock statement filed to the bank as on 31st.03.2007 and the date of inspection is shown as 14.04.2007 in which no adverse comment has been given by the bank manager which means that no sale of stock has been taken place in 14 days which cannot be possible. Looking to all these infirmities and discrepancies in the stock statement filed the bank, in my opinion, making of addition on the base of the stock statement filed to the bank is not justified………………..” 9. The learned CIT A, had resorted to estimating the profit of the assessee by applying the GP rate, as neither the stock shown by the assessee to the bank was reliable nor the stock shown by the assessee in the balance-sheet was reliable. For that purposes the learned CIT A had relied upon the decision of the jurisdictional High Court in the matter of swadeshi cotton Co versus CIT. The
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learned CIT A had applied the GP rate of 15% on the total turnover of ₹ 3, 95, 13, 337/and computed the gross profit of the assessee at ₹ 5 9, 27, 000/. The assessee had computed the gross profit of ₹ 4 856447/and arrived at the GP rate of 12.29%. Thus the learned CIT a had made the addition of ₹ 1 070553/on account of the income not disclosed in the books of account. Thus the learned CIT A had partly allowed the appeal of the assessee. 10. Feeling aggrieved by the order passed by the CIT A the assessee is in appeal on account of the addition made/sustained by the by the CIT A and the revenue is also an appeal on account of conclusion drawn by the CIT A that the stock statement given to the bank is unreliable and therefore the addition cannot be made on account of such statement under section 69 of the income tax Act. 11. The learned AR for the assessee had submitted the written submissions and in the written submission it was submitted by the learned AR that: a. The Stock as per Stock Statement is neither pledged nor in the lock and key of the Bank. b. Balance Sheet as on 31.03.2017, under the head Currents Assets (Point 3) Value of Inventory in Schedule J is shown Rs.24,32,549/-. (APB Pg.34) c. In Schedule J, inventory details of Rs.24,32,549/-. (APB Pg. 35) d. Stock Statement as on 31.03.20017 submitted to Punjab National Bank is in adhoc round figure/vague and further having overwriting at S. No. 8 in rate and cutting in value showing Rs.12 Lacs while it comes to Rs. 8 Lacs only. (APB Pg. 38) e. Inspection Report of Punjab National Bank (having column blank reflecting no inspection has been done) (APB Pg.36) f. Certificate of Punjab National Bank mentioning Bank limit having collateral security of mortgagee of properties and personal guarantee which dilutes the authenticity and the weightage of Stock Statement.(APB Pg. 63) g. SARFAESI Act, 2002. (APB Pg. 64) h. Affidavit of Shri Ramesh Chand Sharma regarding Stock Verification not done by the Bank. (APB Pg. 68 and 69)
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i. Rate of item ‘Elephant’ sold is Rs.60/- while in Stock Statement (APB Pg.38) it is taken as Rs.150/-. (APB Pg. 70) j. Rate of item ‘Hemp/Leather Rug’ sold is Rs.13.25/- while in Stock Statement (APB Pg. 38) it is taken as Rs.40/-. (APB Pg. 71) k. “Q Tally” as per books of 9 items of which the quantity given in Stock Statement (APB Pg. 38) is adhoc in round figures. (APB Pg. 97)
Further the ld. AR for the assessee had drawn our attention to the following decisions support of his contention that the addition made by the CIT AR unsustainable. (i) 200 CTR 595 (Allahabad High Court) CIT Vs. Khan &Sirohi Steel Rolling Mills wherein it was held- “6. The explanation given by the assessee was that it inflated the value and quantity of the stocks in the bank declaration to obtain a number of drafts from the bank. This explanation was accepted by the Tribunal. The matter came up before this court and it was held that Tribunal’s decision was correct. 7. The Tribunal has also found that there was actually no verification of the stock made by any bank official. The learned standing counsel could not point out any contrary decision to show that a practice to inflate stocks hypothecated with the bank with a view to avail higher overdraft facilities, is not prevalent in business community. 8. In view of the fact that the explanation has been accepted by the Tribunal, we do not find any error in the order of the Tribunal. 9. In view of the above, we answer both the questions referred to us in affirmative, i.e. in favour of assessee and against the revenue.”
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(ii) 259 ITR 744 (Rajasthan High Court) CIT Vs. Relaxo Footwear
(iii) 66 TTJ 199 (ITAT Ahmd.) ITO Vs. JagdipKanjibhai
(iv) 53 TTJ 523 (ITAT Chandigarh) Bansal Sons (India) Vs. ITO
(v) [2017] 83 taxmann.com 193 (Calcutta High Court) CIT, Durgapur vs. Shib Shankar Das (Para 9 Pg. 220)
(vi) [2017] 88 taxmann.com 506 (Gujarat High Court) CIT vs. Patel Proteins (P) Ltd. (Para 2 Pg. 222)
(vii) [2013] 40 taxmann.com 177 (Gujarat High Court) CIT, Ahmedabad vs. Riddhi Steel and Tube (P) Ltd. (Para 9.2 Pg. 230)
(viii) [2011] 12 taxmann.com 411 (Punjab & Haryana HC) CIT, Ludhiana vs. Santosh Box Factory (P) Ltd. (Para 2 Pg. 233) 13. Per contra the ld. DR for the revenue had submitted that a ) the assessee has failed to explain the reasons for submitting the inflated stock statement to the bank., b) The stock statement was given to the bank on 31 March 2017 mentioning the stock ₹ 10950000/- ; c) the audit report was also prepared as on 31 March 2017 giving the stock at ₹2 4 32599/; d) the inspection of the stock by the bank official was conducted on 11.4.2017 when there is a certified the stock of ₹ 10950000/-; and e) the special auditor in the audit report had submitted that in the absence of quantitative details of raw material in schedule and work in progress it is difficult to find out the status of the stock and there was no reconciliation of quantity and value of the stock declared to the bank at the time
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of giving the stock statement and the goods dispatched in April but billed in March 2017. 14. The ld. DR relied upon the decision of Hon’ble Allahabad HIGH Court in the matter of Century Foams Pvt. Ltd. CIT 210 ITR 625 [CIT(A) Order Pg. 30] ,Newton Chikli collieries Ltdvs CIT 44ITR 495 SC .196 ITR Raman Lal Kacluralal . 15. Further the ld. DR had submitted that decision rendered by the High Court in Swadeshi Cotton Mills 125 ITR 33, is not applicable as onus is on the assessee to explain reasons for inflation of the stock statement and value, which warranted, the assessee for filing it to the bank. It was submitted by ld. DR once the CIT A had rejected the books of account and was not satisfied about the stock statement given in the audited balance sheet by the assessee , then the learned CIT a should not have restricted the addition to ₹ 10, 70, 553/ only by applying the GP rate of 15%. He should have decided the issues base on scientific basis, ie. By comping the past/ future history or by bringing on record GP of comaparable assessee doing the same business.
We have heard the rival contentions of the parties and perused the material on record. Before we deal with the facts of the matter, we would like to mention various judgement passed by the various high courts in the country on the issue of wrong declaration made to the bank in the stock.
In the matter of [2006] 152 TAXMAN 224 (ALL.) Commissioner of Income-tax, * Meerut vs Khan &Sirohi Steel Rolling Mills hon’ble Allahabad High court had held as under :
The Income-tax Officer asked the assessee to get certificate from the Bank regarding the loan outstanding as well as the security be furnished. The assessee filed a letter dated 15th of December, 1982 of the State Bank of India. A perusal of the said letter shows that the bank has taken the value of the stocks as represented by the assessee through the stock statement dated 19-2-1979. The assessee also produced copy of the stock statement which was given to the bank on 19-2-1979. It has been found by the
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Commissioner of Income-tax (Appeals) that the goods hypothecated to the State Bank of India were the properties of the assessee which were purchased by them against the full payment. The goods were valued according to the market rate and were fully insured. The Tribunal observed that wrong declaration of the stock to the bank could not warrant any addition. It observed that the statement submitted by the assessee was not verified by the Bank Officials. The stocks were only hypothecated and not pledged. The Income-tax Officer could not point out any defect in the trading account of the assessee and the books of account maintained by it which has also been accepted by the Central Excise Department as well as by the Sales Tax Department could not be disbelieved. The Tribunal has placed reliance on the following cases : 1.India Motor Parts & Accessories (P.) Ltd. v. CIT [1966] 60 ITR 531 (Mad.) 2.CIT v. Ramkrishna Mills (Coimbatore) Ltd. [1974] 93 ITR 49 (Mad.) 3.Coimbatore Spg. &Wvg. Co. Ltd. v. CIT [1974] 95 ITR 375 (Mad.) 4.Gaindamal Handa& Sons v. CIT [1980] 4 Taxman 210 (Punj. & Har.) 5. Swadeshi Cotton Mills Co. Ltd. v. CIT [1980] 125 ITR 33 1 (All.). The above cases lay down that it is a practice to inflate stocks with a view to obtain higher overdraft facilities from the banks. In the case of Swadeshi Cotton Mills Co. Ltd. ( supra), the goods pledged with the bank were higher than the book stock. The Income-tax Officer, therefore, rejected the book results and estimated gross profit of 10 per cent on sales and consequently made addition in the income. 6. The explanation given by the assessee was that it inflated the value and quantity of the stocks in the bank declaration to obtain a number of drafts from the bank. This explanation was accepted by the Tribunal. The matter came up before this Court and it was held that Tribunal’s decision was correct. 7. The Tribunal has also found that there was actually no verification of the stock made by any bank official. The learned standing counsel could not point out any contrary decision to show that a practice to inflate stocks hypothecated with the bank with a view to avail higher overdraft facilities, is not prevalent in business community.
In the matter of Commissioner of Income-tax*v.Das Industries [2005] 149 TAXMAN 328 (ALL.)hon’ble Allahabad High court had held as under :
We have perused the order of Tribunal and the authorities below. We do not find any error in the order of Tribunal. 8. In the present case, CIT (Appeals) and the Tribunal found that though the balance sheet was presented before the bank neither the bank has physically verified and certified the stock available with the assessee nor even the Assessing Officer has gone to that extent to device and find out the measure to establish that the assessee did have the balance of stock of harrow and chauff cutter as shown in the alleged inflated figures of these two items submitted to the bank. It was also found that both the opening and closing stock were found inflated in the balance sheet submitted with the Bank. CIT
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(Appeals) and Tribunal also found that in pursuance of such balance sheet, no facilities were given by the bank. On the facts and circumstances, CIT (Appeals) and the Tribunal have accepted the explanation of the assessee that the inflated stock in the alleged balance sheet submitted to the bank was to avail higher credit facility. In our opinion, finding of the Tribunal is the finding of fact based on material on record and cannot be said to be perverse or without any material. The decisions of this Court relied upon by the learned Standing Counsel in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT [1980] 125 ITR 33 1 is not applicable to the present case. In the said case, the Income-tax Officer gathered information from the bank about the goods pledged and found that the goods pledged with the bank were in excess of the stock as per books and rejected the books. Discrepancies found was not only in respect of valuation of goods but also in respect of quantum thereof. The explanation given by the assessee with regard to the discrepancies were not accepted. In reference, the Division Bench of this Court has held that the finding of Tribunal was a finding of fact, which could not be questioned in the reference. Reliance placed by the learned Standing Counsel on the decision of Gauhati High Court in the case of DhansiramAgarwalla v. CIT [1993] 201 ITR 192 is also not applicable. In this case, Income-tax Officer found that loans were being taken from the bank against goods, fixed assets and fixed deposit certificates, Mandi type loans to the extent of Rs. 2,52,012.19 and Lock and Key loans to the extent of Rs. 4,16,815.81, the total being Rs. 6,68,828. The Bank was advancing loans to the extent of a maximum of 70 per cent of the value of the securities offered. The assessee, in order to secure loan of Rs. 6,68,828 had to offer securities to the extent of Rs. 9,95,000. As per the balance sheet as on 31-3-1972, security had been offered to the tune of Rs. 6,42,703, that is, closing stock of Rs. 4,17,370 fixed assets being Rs. 1,73,333 and fixed deposit certificates being Rs. 50,000. On enquiry being made in the course of assessment proceedings for the assessment year 1973-74 with the bank it was found that the assessee had disclosed stock amounting to Rs. 9,21,507 as on 31-3-1972 and certified the statement of stock to be true and correct. On this basis, the Income-tax Officer found suppression of stock to the extent of Rs. 5,04,137 in the accounts of the assessee. Assessee has not offered any explanation about the said discrepancies and, therefore, the difference in the amount has been added as a suppressed income. 9. We also not find any error in the order of Tribunal granting renewal of registration to the firm. For the reasons stated therein, learned Standing Counsel is not able to point out any error in the order of Tribunal in this regard.
In the matter of Vrundvan Roller Floor Mill 2016] 72 taxmann.com 250 HIGH COURT OF GUJARAT held as under :
Having heard learned advocates appearing on behalf of the parties and the question posed for consideration before us reproduced hereinabove and considering the decisions of this Court, the question which is raised in the present appeal is required to be answered in favour of the assessee. We are not giving further elaborate reasons for the same as in the case of Riddhi Steel and Tubes (supra) it is held by this Court that only on account of inflated statements furnished to
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the banking authorities for the purpose of availing of larger credit facilities, no addition can be made if there appears to be a difference between the stock shown in the books of account and the statement furnished to the banking authorities. Similar view has been taken by this Court in Tax Appeal No. 1371 of 2006 vide decision rendered on 12.12.2014. 7.1 It is a settled law that only on account of inflated statements furnished to the banking authorities for the purpose of availing of larger credit facilities, no addition can be made if there appears to be a difference between the stock shown in the books of account and the statement furnished to the banking authorities. If, for the purpose of fulfilling the margin requirements of the bank purely on inflated estimate basis, when the stock statement had reflected inflated value of the stock, in wake of otherwise satisfactory explanation, both - for the purpose of value as well as quantity and taking into account the actual non verification of stock, we find no reason to interfere with the order of the Tribunal. Accordingly, the question is answered in the affirmative i.e. against the appellant - revenue and in favour of the assessee. We hold that the Tribunal was right in law in deleting the addition made on account of difference in stock statement as furnished before the bank as compared to shown in books of account. 20. In the matter of Patel Proteins (P.) Ltd.*[2017] 88 taxmann.com 506 (Gujarat) HIGH COURT OF GUJARAT held as under :
Learned Counsel for the appellant has drawn the attention of this Court to the decision in the case of CIT v. Patel Proteins (P.) Ltd. in Tax Appeal No.1371/2008 dated 12.12.2014 (who is also the same assessee in this Tax Appeal) and relevant paragraph of the said decision reads as under :— "7. Having heard learned advocates appearing on behalf of the parties and the question posed for consideration before us reproduced hereinabove and considering the decisions of this Court, the question which is raised in the present appeal is required to be answered in favour of the assessee. We are not giving further elaborate reasons for the same as in the case of Riddhi Steel and Tubes (Supra) it is held by this Court that only on account of inflated statements furnished to the banking authorities for the purpose of availing of larger credit facilities, no addition can be made if there appears to be a difference between the stock shown in the books of account and the statement furnished to the banking authorities. Accordingly, the question is answered in the affirmative i.e. against the appellant revenue and in favour of the assessee. We hold that the Tribunal was right in law in deleting the addition made on account of difference in stock statement as furnished before the bank as compared to shown in books of account for availing higher credit facility." 5. Considering the ratio laid down in the above decision and in the facts of the present case, we are of the view that the issues raised in the above Tax Appeals need to be answered in favour of the assessee and against the Department.
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Similarly in the matter of Apcom Computers (P.) Ltd.[2007] 158 TAXMAN 363 (MAD.)HIGH COURT OF MADRAS held as under:
Heard the counsel. Any addition on account of difference in stock can be made only on adequate materials, but not arbitrarily. Admittedly, there was a difference between the value of closing stock declared to the bank and to the Income-tax authorities. There is no dispute that the assessee was maintaining books of account on day-to-day production. The assessee, in the present case, has taken the actual physical stock for the purpose of declaring closing stock to the Income-tax authorities. Further the purchases and sales were supported by vouchers and the Assessing Officer had not pointed out any suppression of sales or purchases. There was a finding by the authorities below that the statement given to the bank was on estimate basis without any actual physical verification and the same was not supported by books of account. We find there is evidence to show that stock declared to the Income-tax Department was supported by books of account. No detailed inventory was also available in the statement made to the bank. Except a mere value declared for overdraft purposes to the bank, there were no detailed items of stocks in support of the declared value. It was also pointed out that there was no physical verification of stock, either by the assessee or the bank at the time of furnishing the stock statement. The Tribunal as well as CIT(A) given a concurrent finding that the assessee declared closing stock for assessment purpose which is based on actual physical verification. There is enough materials available on record and the conclusion reached by the Tribunal is based on valid materials and evidence. In view of the same, there is no basis to treat the difference in value as the assessee’s under- valuation of stock or undisclosed income. The Tribunal also rightly followed the principles enunciated by this Court judgment in the case of CIT v. Sri Padmavathi Cotton Mills [1999] 236 ITR 340 . 22. In the matter of SatyaNarain Maheshwari [2014] 42 taxmann.com 6 (Rajasthan) HIGH COURT OF RAJASTHAN held as under : 3. It was challenged by the assessee in appeal before the Commissioner of (Appeals) and claimed that he is maintaining records to justify its stock and the Assessing Officer accepted all the books of account and has not found any defect in the books and as there was no mistake in taking the stock which was reflected as on 31.03,2006. His further explanation was that the assessee has taken credit facility in the form of working capital limit from the Bank and the periodical stock statement was submitted to the bank as required and this being hypothecation limit and based on the stock available with the bank, the bank is allowing the credit facility after having certain margin and the stock statement given to the Bank mentioning the
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quantity of paddy and rice Basmati and this stock statement was prepared before booking the sale for the rice lying with the other parties (called or sale) and this being a system of nature of trade of sending goods to some parties (agents). The goods are in their godown, and which they sale periodically and the assessee gets advances from them and when they get sale details (Sale Patti), the sale is booked and the stock is accordingly reduced and apart from practice being followed it was claimed that during the financial year, quantity of rice stock was lying with M/s. Rajendra Kumar Mohan Lal & Co., Pune as on 31.03.2006 in the stock statement which was given to the bank, therefore, that stock included the stock lying with that party but before audit and after 31st March when the assessee received the Sale Patti from that party and the amount which was shown as stock was booked in the sale and the stock was reduced accordingly and the practice followed by the assessee was supported and approved by certain High Courts of which reference has been made by the Commissioner (Appeals) and taking note thereof, the commissioner (Appeals) in its detailed judgment observed that the process of writing accounts and preparing balance sheet and profit and loss account there from is an elaborate and rigorous process and such books of account are liable to inspection by Sales Tax and VAT systems and there are different levels of scrutiny to ensure correctness and completeness of the books of account. As against this, the process of stock taking for the purpose of hypothecation of stock with the bank is a relatively loose process and the bank very broadly aims at mitigating its risk by ensuring that sufficient securities are available, including stock-in-trade and without any evidence to the contrary, the balance sheet and profit & loss account has to be relied upon rather than the statement of stock submitted to the bank for hypothecation purpose and there was nothing on record and no finding was brought on record which could establish the existence of excess physical stock of rice which could corroborate the statement of stock given to the bank and after recording its full satisfaction accepted the explanation furnished by the assessee and held that the addition made by the Assessing Officer treating it as unexplained and undisclosed investment in stocks u/s. 69B of the IT Act deserves deletion and against which the revenue came before the ITAT and the grievance raised by the revenue was that the CIT (A) has erred in deleting the addition made by the Assessing Officer on account of unexplained/undisclosed stock u/s. 69B of the Act. 4. The ITAT also after taking into consideration the factual matrix and so also the explanation which was extended by the assessee before the authority observed that the addition which was made by the Assessing Officer u/s. 69B has been made only for the reason that there was difference in the stock of rice and in the statement furnished to the bank as disclosed in the balance sheet and the said difference was essentially due to the consignment sale and sale patti was not received till furnishing the statement to the bank and at the same time, it was included in the stock lying at the godown of M/s. Rajendra Kumar Mohan Lai & Co., Pune which was sold on the last day of the accounting year and the assessee received the sale patti in the succeeding month i.e. in the month of April, 2006 and accordingly there was no addition which was called for u/s. 69B of the Act as it was not a case of suppression of
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stock and finally affirmed the order of the learned CIT, (Appeals) and held that it has rightly deleted the addition made by the Assessing Officer. 5. As regard other grounds no submission was made before us and the appeal confined only to the addition which was initially made by the Assessing Officer u/s. 69B of the Act. 6. Counsel for appellant has vehemently urged before us and submitted that the addition which was made by the Assessing Officer u/s. 69B of the Act was well reasoned duly supported with the evidence on record but that was not properly appreciated either by the CIT (Appeals) or the ITAT and this requires consideration by this Court as to how far the ITAT was justified in deleting the addition made by the Assessing Officer u/s. 69B of the Act on account of unexplained/undisclosed stock of rice. 7. After hearing counsel for appellant and perusal of orders of CIT (Appeals) and ITAT, in our view what is being urged is misconception of law and fact and the explanation furnished by the assessee regarding discrepancy which shown in the stock statement given to the bank and the stock given in the account of firm was well-explained and the addition made by the Assessing Officer u/s. 69B of the Act was not considered to be acceptable in the facts of the instant, case by both the authorities. 23. The Ld. DR had relied upon the decision of the jurisdictional High Court in the matter of century forms versus CIT 210 ITR 625 . In this decision the Hon’ble Court has held as under :
In the instant case when the matter came to be heard before the Tribunal, the assessee shifted itself from its previous stand which it had taken before the ITO in the reply filed before him which the assessee also relied upon before the first appellate authority. The assessee produced a certificate from the bank, dated 18-12- 1989, before the Tribunal for the first time saying that according to the audited balance sheet as on 31-3- 1981, which is on the record, the outstanding balance of the stocks and stores (certified by the directors) is of Rs. 41,094.35. It was also urged before the Tribunal that the assessee's director had filed an affidavit to the effect that the word 'checked' written in the stock statement was not correct and actually nobody had signed on behalf of the company on the stock statement submitted to the bank. The Tribunal repelled these submissions and observed that it is not understandable how a certificate from the bank was obtained at that stage when an opportunity was available to the assessee earlier and it could have filed the certificate then. The Tribunal remarked that it was not open to the assessee to have resiled from its earlier stand and to urge that the stock statements filed before the bank had not been signed by anyone on its behalf when the same advocate who was arguing the case before it had given an explanation before the Commissioner (Appeals) regarding physical verification of the stocks hypothecated by the director coupled with the reply that such stocks shown in the statement were inflated in order to obtain higher overdraft. The Tribunal has referred the reply of the assessee and recorded a finding that the assessee had not disputed the submission of stock
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statements to the bank where the difference appeared and, secondly, with regard to the word 'checked' written on the statement, the explanation was that the word 'checked' cannot be equated with the physical verification. It held that the stand now taken disputing the signature on the stock statement was an afterthought and the affidavit filed to that effect was only a self-serving document which does not fit into the facts and circumstances of the case. We may observe that the Commissioner (Appeals) in his order had pointed out that the statements of stocks submitted by the assessee were taken into account by the bank before allowing the overdraft facility. The bank authorities had also checked the stock statements not with regard to arithmetical accuracy but with regard to the items pledged with the bank on which overdraft was allowed. This finding was recorded after the matter was remanded by the Commissioner (Appeals) to the ITO for further investigation. The returns submitted to the Rubber Board and the order of the sales tax authorities relied upon by the assessee have been discussed at length in the assessment order. There is a categorical finding that the returns filed before the Rubber Board have no evidentiary value as it has not been proved that any actual verification of the stock or its purchases was made by the Rubber Board. The ITO also referred to the bank declaration filed by the assessee. The said declaration contained a statement, inter alia, to the effect that quantity, quality and weight given in the statement are correct and the stocks hypothecated belonged to the assessee which were unencumbered and were not subject to any other lien, claim or charge of any sort. It also contained the endorsement 'checked' and was signed by the manager. As observed earlier, the assessment was confirmed by the appellate authority as well as by the Tribunal. 6. It is evident from the above that the Tribunal examined the question of impugned addition on the basis of the explanation given by the assessee, the affidavit and other material that had been brought on the record and taking into account the circumstance emerging therefrom and the reasoning given by the income-tax authorities. It is not correct to say that the Tribunal has omitted to take into consideration the material that was placed before it on which reliance was placed on behalf of the assessee. At the cost of repetition it may be stated that in view of the categorical admission involved in the declaration filed before the bank and the quantity of the hypothecated stock, the Tribunal remarked that the assessee was not permitted to shift its stand that it had taken before the income-tax authorities and it entirely agrees with the finding given by the Commissioner (Appeals) for making the addition on account of undisclosed stock of Rs. 38,747. The case of the assessee that there was some commercial practice in the trade to inflate the stock position to procure easy and higher loan facility, was not accepted as factually proved or of which judicial notice could be taken. The learned counsel for the assessee is not right when he argues that it is accepted by the revenue that the stock position before the bank was inflated in order to get higher bank overdraft. It cannot be denied that the burden was squarely upon the assessee to show that the apparent tenor was not real as contained in the stock statement filed before the bank which the assessee failed to discharge. It is pertinent to observe that the difference was not only in the valuation of the stocks but also in the items of the stocks hypothecated which on solemn declaration by the assessee was certain as 'checked' and acted upon by the bank after due verification. If there was actual discrepancy in the stocks hypothecated to the bank and that shown in the accounts
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which the assessee failed to explain by any acceptable explanation or material, no exception can be taken to the addition made by the authorities and it was open to the Tribunal to come to such a conclusion that the assessee had stocks outside the account books. The fact remains that the assessee did not succeed in explaining the discrepancy in the stocks hypothecated with the bank and that shown in the account books. The explanation of the assessee having been rejected, the question is whether the finding of the Tribunal sustaining the impugned addition is based on no material evidence. With regard to this question, we may refer to a decision of the Supreme Court in Newton Chikli Collieries Ltd. v. CIT [1962] 44 ITR 495 where it was held: "... It was for the income-tax authorities to consider the correctness or otherwise of these explanations. If the income-tax authorities chose not to accept these explanations as correct, that does not mean that the finding as to inflation of wages at which they arrived was a finding based on no material….." (p. 499) In that case the assessee showed under the head 'Wages and salaries' a sum which was considerably more than the amount shown under that head in the previous year. The income-tax authorities rejected the explanation given by the assessee for the absence of the receipts for payment, and held that the wages had been inflated, and added back those amounts to the income. The Supreme Court held that in view of the findings of the authorities that the wages had been inflated, it was a finding of fact and that non-acceptance of the explanation given by the assessee would not convert the question of inflation of wages which is essentially a question of fact into a question of law nor can it be said that the finding was based on no material. We may observe that the discr- epancy in the stock hypothecated with the bank and that found recorded in the account books was noticed not only on the last day of the previous year, that is, 31-3-1981, but also on two other dates, that is, 31-5-1980 and 31-8-1980, to which we have referred earlier. From the order of the appellate authorities it appears that the assessee gave no explanation about the discrepancies which were noticed on 31-5-1980 and 31-8-1980. The explanation furnished, it appears, was only with regard to the position which was at the end of the previous year with reference to the stock hypothecated with the bank and that disclosed in the books of account as on 31-3-1981. Reliance placed on behalf of the assessee on a Division Bench decision of this Court in CIT v. General Metal Works [1988] 172 ITR 173, is misplaced. That authority is clearly distinguishable on the facts. In that case, the discrepancy in the stock hypothecated with the bank and that shown in the account books was explained to the satisfaction of the Tribunal which is the final fact-finding authority. The revenue moved an application to this Court for a reference under section 256(2). The application was rejected by this Court and it was held that the findings recorded by the Tribunal were pure findings of fact which did not give rise to any question of law. In fact, that decision supports the view which we have taken in the instant case that the order of the Tribunal does not give rise to any question of law. The learned counsel for the parties had cited certain other authorities also at the Bar in support of their rival contentions, but we do not think it necessary to refer to them as each case turned on its own facts.
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We will first deal with the decision cited by the ld. DR for the revenue , the facts of the said case was that for the first time before the appellate tribunal ,the assessee had submitted that the inspection report signed on behalf of the assessee was not correct and the certificate at the stage of income tax appellate tribunal was filed by the ld. AR for the assessee . In those fact the tribunal had observed that once the opportunity was available with the assessee at the assessment stage and the assessee had not challenged the statement furnished to the bank ,the assessee is not permitted to resile from its earlier stand. In those fact the honourable high court had held that the difference in stock taken into the balance-sheet by the assessee and the stock hypothecated to the bank is liable to be taxed under section 69 of the income tax Act .
In the present case it was the case of the assessee before the assessing officer as well as before the CIT A that the stock statement given to the bank was inflated the inspection carried out by the official of the bank was a sham inspection as the details required to verify the stocks and value the stocks were conspicuously missing from the inspection report . besides these aspects the assessee had also given various description by the inspection report was incorrect. The assessee had also filed an affidavit of Mr. Sharma husband of the assessee in support of her case that the inspection report was nonest in the eyes of law . The learned CIT A after receiving the objections in respect to the statement furnished to the bank and inspection report at the appellate stage had asked the assessing officer to file the remand report however in the remand report the assessing officer had neither verified the inspection report from the bank officials nor he had taken the statement of Mr Sharma who had given the affidavit in support of the case of the assessee that the inspection report was nonest in the eyes of law . In view of these facts the decision relied upon by the ld. DR for the revenue is not applicable to the present case. As mentioned hereinabove in paragraph 17-22 , the law laid down by various high courts , is fairly settled that if the inspection report of the stock taken by
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the bank is objected to by the assessee and plausible explanation is given and further the statement given to the bank giving the inflated stock statement for the purpose of taking loan et cetera, the same is not required to be considered for the purposes of making the addition under section 69 of the Act. Respectfully following the decision of the jurisdictional High Court in the matter of Khan & Sirohi Steel Rolling (Supra) and other high courts we dismiss the ground raised by the revenue in this regard. Ground No. 2 of Appellant’s ITA No. 299/AG/2013 & Ground No.1 of Revenue’s appeal “3. Because in any view, the addition made and confirmed by ld. CIT(A) of Rs.10,70,553/- out of total addition of Rs.85,17,451/- by applying G.P. rate of 15% (against 12.29% declared) is arbitrary, unjust, wrong, illegal, and against the facts and law of the case.” 26. In this regard the ld. AR for the assessee had submitted That CIT(A) held that the G.P. Rate declared of Rs.12.29% appears to be on lower side in this type of business of selling of handicraft items and hence estimated GP rate of 15% and added amount of Rs.10,70,553/- referring the decision of Hon’ble Allahabad High Court in the case of Swadeshi Cotton Company Limited .
It was submitted by the learned AR that the facts of Swadeshi Cotton company case are distinguishable. It was submitted that in said case it was observed that goods pledged were with Bank while in the case of the appellant / assessee before us, goods were not pledged and were not under the physical control of the Bank. Further it was submitted that Stock shown in the Balance Sheet could not be verified by Auditor as the Stock is as on 31.03.2007 and the Special Audit u/s 142(2A) Report is dated 15.06.2010 (APB Pg. 105), hence in 2010 it is not possible to verify the stock of 31.03.2007. further no excess stock was found in survey on 21.02.2007.
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The AR had submitted that this is the first year of the business and Books have not been rejected by the AO while computing the income in the Assessment Order. That there is no Opening Stock. The Purchases and Sales have been accepted.No defect in Closing Stock has been found. The G.P. shown has wrongly been rejected. That estimating G.P. Rate without giving any comparable case is against the Principles of Natural Justice.
The AR relied upon [1968] 68 ITR 796 Joseph Thomas & Bros. Vs. CIT wherein it was held “I was common ground that no details of the cases which the ITO considered as comparable were ever furnished to the assessee. This was a violation of the settled principle on the subject and the provision of sub-section (3) of section 142. Therefore, there was non-compliance of the provisions of section 142(3) and hence, the assessment order passed under section 143(3) was vitiated”. 30. The connected ground raised by the assessee, that the action of the learned CIT A was incorrect whereby he had confirmed the addition of ₹ 10,70,553/- on account of GP addition by taking the GP rate at 15% instead of 12.29%. In this regard we may usefully rely upon the decision of the learned CIT A para 6.9 page 40 of order, wherein he had mentioned that the stock register was not maintained by the assessee in accordance with law. Further at Page 38 the ld. CIT(A) had categorically mentioned about rejection of books of account of the assessee. This finding of fact had not been disputed by the assessee before us. Further it was mentioned that there was difference in stock statement given to the bank officials, auditors report and the balance-sheet of the assessee, therefore the CIT A had made the additions by estimating the GP rate of 15% on the turnover.
In our view, the income of the assessee is required to be estimated after taking into account the business of the assessee, past and future G.P. and the profit earned by the comparable assessee doing the same business. The ld. CIT(A) has not brought on
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record any of these factors which could have been considered by him for estimating the G.P. rate of the assessee. Ultimately, the estimation of the G.P. rate in the absence of any of these material is only a guess work/estimation by the CIT(A) or by the Bench. In view of the above, we reduce the G.P. rate by of 15% as estimated by the CIT(A) to 14%. Thus, the assessee get the benefit of 1% of G.P. rate. In the result, the Ground no.2 of the assessee’s appeal is partly allowed and the Ground No.1 of Revenue’s appeal is dismissed.
We may so like to add this juncture, the appeal of the Revenue is liable to dismissed not only on the basis of above said finding but also on account of the CBDT circular issued by a CBDT bearing Circular No. 17 of 2019 dtd. 08.08.2019 whereby the tax limit of the appeals before the Tribunal had been enhanced to 50 lakh. In the present case, the tax effect of the Revenue’s appeal less then 50 lakh, and the proceeding are pending before the Tribunal as no final order has been passed till date. Hence, the appeal of the Revenue is liable to dismissed and accordingly we dismiss the appeal of the Revenue. Ground No. 3 of Appellant’s ITA No. 299/AG/2013 33. 3. Because in any view, the addition confirmed by ld. CIT(A) by disallowing interest in excess of interest 12% to relatives u/s 40A(2)(b) viz-a-viz (i) Shri Ramesh Chand Sharma, (ii) Ramesh Chand Sharma HUF, (iii) Devangi Sharma, and (iv) Smt. Shivangi Sharma is arbitrary, unjust, excessive, and against the facts and law of the case.
The ld. AR had drawn our attention to the order passed by the ld. CIT(A) whereby he had directed the Ld. AO in Para 7.3 and 7.4 for computing the making in terms of the observation made by him.
Per contra, the ld. DR relied upon the order passed by the lower authorities.
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We have heard the rival submissions and have perused the record of the case. In this regard AO had made the additions in respect of the excess interest payment made by the assessee to his relatives/family members who are coming under the definition of section 40 A (2) (b) of the Act.It was noted by the assessing officer that the interest paid to the relatives was at the rate of 15% whereas the interest paid to unrelated parties was to the tune of 8% and 6%.
In appeal, the learned CIT(A) had granted partial relief to the assessee by considering that the normal rate of interest with unsecured loans prevailing in the market at 12%. Therefore, CIT(A) had granted partial relief to the assessee by directing the assessing officer to make the additions for the difference at the rate of 3% instead of 7%. Before us, the AR for the assessee had not demonstrated any error in the order passed by the CIT A as he had failed to demonstrate either the prevailing rate in the market was more than 12% or there was an error in the decision of the assessing officer whereby he had taken 15% as the rate of interest paid by the assessee to the relatives. Therefore, we do not find merit in the ground raised by the assessee , hence we dismiss the Ground No.3 of the assessee’s appeal, and the order of the CIT(A) is upheld.
In the result, appeal of the Revenue is dismissed and the appeal of the assessee is partly allowed.
(Order pronounced in the open court on 19/08/2019) Sd/- Sd/- (Dr. Mitha Lal Meena) (Laliet Kumar) Accountant Member Judicial member
Dated: 19/08/2019 Aks(Tour)
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Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order
Assistant Registrar Income Tax Appellate Tribunal Agra Bench, Agra